Guaranteed investment certificates and savings accounts are the real deal right now.
As in, real returns. The year-over-year inflation rate dropped to 3.4 per cent in May from 4.4 per cent the previous month, which means real returns from GICs and savings accounts improved dramatically. You could get as much as 4.1 per cent in an online high interest savings account in late June, which means an after-inflation return of 0.7 per cent. Rates as high as 5.35 per cent were available for a one-year term in the GIC world, which means a real return of 1.95 per cent.
We are in a sweet spot for savers and conservative investors in mid-2023, with potential for even better returns just ahead. While inflation has backed off lately, it’s still too high for the Bank of Canada. This is why the central bank increased its overnight rate earlier this month and may do so again in July. Every bit of daylight that opens up between the inflation rate and return on GICs and savings adds to the appeal of safe investing.
The big knock on GICs and savings accounts last year was that while rates were much better than we’ve seen in ages, they still lagged inflation. The inflation rate hit 8.1 per cent last June, but has been falling ever since.
For the best real returns, try the stock market. Over long periods of time, let’s say at least five to 10 years or more, the total returns of stocks (share price gains plus dividends) should well exceed the inflation rate. The cost of that performance is volatility that, in practical terms, means losing money in some years.
GICs and savings are all but risk-free if you stay within deposit insurance limits. So while their real returns may be less than what stocks offer over the long term, they still score well on a risk-adjusted basis.
Another criticism of GICs and savings is that interest is taxed like regular income when held in a bank account or a non-registered investment account, whereas dividends benefit from the dividend tax credit and capital gains from a 50 per cent inclusion rate. The answer here is to consider a tax-free savings account for your 5-per-cent GICs.
This golden period for saving and conservative investing will last until financial markets are confident the Bank of Canada is done with rate hikes. We’ll get some insight into the central bank’s thinking about inflation on July 13, the next date in which the overnight rate can be adjusted. In the meantime, GICs and savings accounts look particularly good. Tell the critics to get real.
